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Micro-Economics Project

Advertisement, Pricing and Market share of firms in the Automobile Industry

Presented by:

Ashutosh Verma (WMP08007)

Bharat Krishnan (WMP08008)

Davinder Singh (WMP 08009)

Deepak Jaiswal (WMP 080010)

Deependra Singh (WMP 08011)

Dheeraj Gupta (WMP08012)

Structure of Presentation

o Introduction o Market Structure and Implication o How does such advertising help consumers and promote efficiency o The power of Advertising o Five Force Model o Marketing Structure and Implication o Effects of Advertising, Pricing, Promotions and New Product Innovations o Auto sector growth o Auto Sector Advertisement: Analysis

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Introduction

Automotive industry, globally, as well in India, is one of the key sectors of the economy. Therefore the industry is recognized as one of the drivers of economic growth as it contributes significantly to the overall GDP of the nation. It has been identified as a sector with a high potential to increase exports and employment. With a high cost of developing production facilities, limited accessibility to new technology, and increasing competition, the barriers to enter the Indian Automotive sector are high. The key to success in the industry is to improve labor productivity, labor flexibility, and capital efficiency. Having quality manpower, infrastructure improvements, and raw material availability also play a major role.

Access to latest and most efficient technology and techniques will bring competitive advantage to the major players
Utilizing manufacturing plants to optimum level and understanding implications from the government policies are the essentials in the Automotive Industry of India.

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Five Force Model

Michael Porter identifies five forces that influence an industry. These forces are
Degree of Rivalry Despite the high concentration ratio seen in the automotive sector, rivalry in the Indian auto sector is intense due to the entry of foreign companies in the market. The industry rivalry is extremely high with any being product being matched in a few months by the competitors. Threat of Substitutes The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence and value offered by automobiles. Barriers to entry The barriers to enter automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. Suppliers power In the relationship between the industry and its suppliers, the power axis is tipped in industrys favor. The industry is comprised of powerful buyers who are generally able to dictate their terms to the suppliers. Buyers Power In the relationship between the automotive industry and its ultimate consumers, the power axis is tipped in the consumers favor due to the fairly standardized nature and the low switching costs associated with selecting from among competing brands.

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Market Structure and Implications

The automobile industry in India, follows a strictly oligopoly-type structure with the characteristics.

An industry dominated by a small number of large firms Firms sell either identical or differentiated products in terms of service quality and offerings The industry has significant barriers to entry Few number of firms contributing to majority of the market share MR=MC p>MC Entry Barriers Firm is a price-setter Long run profit >= 0
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Market Structure and Implications

PRICE MECHANISM IS OLIGOPOLY MARKET Point A represents the price in an oligopoly market. Above this price, an individual firm is afraid of increasing prices. The perception is that the competition will not follow a firms price increase. If they do not follow they will get the firms customers and sales. Therefore a price increase would create an elastic demand curve above price P. If demand is elastic and prices rise, then total revenue falls. A price decrease has a similar effect. The reasoning is that if the competitor does not follow the price cut, firms will entice customers away from the competitor. Therefore the competition must follow price cuts or lose customers and sales. As a result a price decrease would create an inelastic demand curve below price P. If demand is inelastic and prices decrease, then total revenue also falls.
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Market Structure and Implications

KINKED DEMAND CURVE The following figure shows the kinked demand and marginal revenue curve. The profit maximizing level of output occurs when marginal revenue = marginal costs, and the profit maximizing price is the maximum price consumers will pay for that level of output. The kinked shaped marginal revenue curve implies that there exists a range over which changes in marginal costs will not impact the profitmaximizing level of output. Therefore, firms may have no incentive to change price provided that marginal costs remains in a given range. Because of the effect a firms price changes have on the behavior of competitors, firms in a oligopoly do not want to change their prices.

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How does such advertising help consumers and promote efficiency

Advertising can create brand loyalty and decrease the price elasticity of demand.
Advertising can also provide information about where products can be found, thereby increasing competition. As a consequence, advertising can result in either an increase or a decrease in the price of the product compared to what it would be if there were no advertising in the industry. Advertising increases costs. However, advertising can also increase revenues. So advertising may cause profits to either increase or decrease relative to what they would be if there were no advertising in the industry.

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The power of Advertising

Advertising has the power to persuade, the power to influence the mind and shape destiny. It has the power to change markets and improve profit margins. Advertising has short-term power (conveying new information, building awareness, enhancing credibility, etc.) and long-term power (conveying brand image, attaching emotional values to the brand, building positive reputation, etc.).

The companies that master the creative guidance and the testing systems to consistently develop and deploy great advertising will own the future and the fortunes that go with it.

Great advertising is a cloak of invincibility.

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Advertisemnt: creating market share

Advertisement is creating the markets as well as building the brand value Often eats into other companys market share, but helping to create markets as well.

Advertisement has mainly cumulative effect


Not all markets are created by advertisement alone, but yes it is also playing role in generating revenue from increased sales.

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Arguments about advertisement

Some of the arguments in favor of advertising are Advertising is informative Advertising increases sales and permits economies of scale Advertising increases sales and contributes to economic growth Advertising supports the media Advertising increases competition and lowers prices.

Some of the arguments against advertising are Advertising is not informative but competitive Advertising raises the cost curve Advertisers may use their influence to bias the media Advertising is used as an entry barrier Advertising is not a productive activity.

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Auto Sector Advertisement: Analysis

Sales(In Billion)
Advertising by media

Broadcast TV $2.3 billion Cable TV $1.3 billion Cinema $247 million Direct mail $1.3 billion Directories $231 million Online $7.3 billion Newspaper $5.0 billion Other print $2.5 billion Outdoor $561 million Radio $1.6 billion Telemarketing $294 million

Outdoor 3%

Telemarketing 1% Radio 7% Broadcas t TV 10% Cable TV 6% Cinema 1% Direct mail 6% Directories 1%

Other print 11%

Newspaper 22% Online 32%

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Auto Sector Advertisement: Analysis

Analysis of their advertisement expenditure and net sales turnover suggests companies in auto sectort witnessed robust growth in their sales turnover according to an ASSOCHAM Study. The elasticity of advertisement to net sales for the auto sector was found to be -1.32 as against 0.80 per cent for the FMCG sector as analyzed by the ASSOCHAM Eco Pulse (AEP) Study.

The analysis of three major auto companies in the two wheeler segment revealed that Hero Honda spent 12.54 per cent more on the advertising and sales promotion activities in 2010-11 as compared to 2009-10 while its net sales increased by 19.23 per cent during the period. Bajaj Auto Ltd. and TVS motors cut their advertising expenditure by 32.94 per cent and 12.02 per cent respectively in 2010-11. However, according to their net sales figures, TVS motors registered a growth rate of 14.02 per cent whereas Bajaj Auto Ltd. witnessed a decline of 6.60 per cent during 2010-11 over the corresponding period of 2009-10

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Effects : Pricing and Incentives

Pricing plays important role in capturing market share - specifically with Indian consumers Competitive Pricing within a car segment and between segments. It has resulted in new segments being created Ertiga ( supposedly a comptetitor to Innova) Promotional incentives increase the value of the product to the consumer. Positive short-term effects of promotions Promotional growth need strong backing from quality product

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Effects : New Products and Innovation

Revenue from new products take considerable time and also depends on several factors, including the degree of product innovation. New-product introductions may have a persistent effect on revenues, as opposed to price promotions Price promotions produce only temporary benefits. Effect of new product could be temporary due to limited innovation Effect of new product could be long term when it transforms competitive capabilities.

Long-term profit benefits can be jeopardized by several factors development and production costs are considerable(new-car platforms cost over one billion dollars (Wall Street Journal 2002c). New-product launch consumes considerable marketing resources, especially for a major innovation.

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Effects : New Products and Innovation

Finally, we recognize that dynamic feedback loops may exist among marketing variables, among performance variables and between marketing and performance variables. Marketing actions such as new- product introductions and promotional incentives are often related over time Successful new-product introductions can increase a brands price premium and make promotions redundant In contrast, a prolonged absence of successful new-product introduction may force a company to use promotional incentives in order to move product.

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New Products and Innovation : Product Launches (by top 3 passenger car market share leaders )

Maruti Suziki 1. Versa (20012010) 2. Grand Vitara XL7 (2003 2007) 3. Swift (Launched 2005) 4. Estilo (Launched 2007) 5. SX4 (Launched 2007) 6. Grand Vitara (Launched 2007) 7. Swift DZire (Launched 2008) 8. A-star (Launched 2008) 9. Ritz (Launched 2009) 10. Eeco (Launched 2010) 11. Alto K10 (Launched 2010) 12. Kizashi (Launched 2011) 13. Maruti Ertiga(Launched 2012) 14. Maruti XA Alpha launched in the year 2014

Tata Motor Cars 1. Tata Sumo 2. Tata Sumo Grande 3. Tata Safari 4. Tata Indica 5. Tata Vista 6. Tata Indigo 7. Tata Manza 8. Tata Winger 9. Tata Magic 10. Tata Nano 11. Tata Xenon XT 12. Tata Aria 13. Tata Venture 14. Tata Iris 15. Tata Indigo Marina 16. Tata Sierra 17. Tata Estate

Hyundai Motors 1. Hyundai Accent Executive (Launched 2011) 1. Hyundai Santro Xing (Launched 2003) 2. Hyundai Uber Cool i20 (Launched 2008) 3. Hyundai Next Gen i10 (Launched 2010) 4. Hyundai Fluidic Verna (Launched 2011) 5. Hyundai EON (Launched 2011) 6. Hyundai Terracan (20032007) 7. Hyundai Elantra (20042007) 8. Hyundai Tucson (20052010) 9. Hyundai Sonata Transform (20102011) 10. Hyundai Santa Fe (Launched 2010) 11. Hyundai Sonata (Launched 2012) 12. Hyundai Santro (19982001) 13. Hyundai Accent GTX (19992002) 14. Hyundai Atos Prime (20032008) 15. Hyundai Getz (20042007) 16. Hyundai Accent GLS (20042005) 17. Hyundai Amica (20052008) 18. Hyundai Sonata Embera (20052009) 19. Hyundai Accent GLE (20062011) 20. Hyundai Verna (20062010) 21. Hyundai Getz Prime (20072010) 22. Hyundai i10 (2007-2010) 23. Hyundai Verna Transform (2010-2011) 24. Hyundai New Look Santro (20012003) 25. Hyundai Sonata Gold (20012005) 26. Hyundai Accent Viva (20022004) 27. Hyundai Accent CRDi (20022004)
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Auto Sector w.r.t. GDP and Per Capita

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THANK YOU

Ashutosh Verma (WMP08007)

Bharat Krishnan (WMP08008)

Davinder Singh (WMP 08009)

Deepak Jaiswal (WMP 080010)

Deependra Singh (WMP 08011)

Dheeraj Gupta (WMP08012)

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